I bought a property and lived in it for 1.75 years, then rented it out for 2.5 years. If I move back in for 0.25 years will I qualify for the $250,000 primary exemption?

[TaxGuyBill]

Yes, read the Code.  The Code had not changed, nor anything else official.  Only the poor revision of Publication 523 has changed.


(C) Period of nonqualified useFor purposes of this paragraph—
(i) In general

The term “period of nonqualified use” means any period (other than the portion of any period preceding January 1, 2009) during which the property is not used as the principal residence of the taxpayer or the taxpayer’s spouse or former spouse.
(ii) ExceptionsThe term “period of nonqualified use” does not include—
(I) any portion of the 5-year period described in subsection (a) which is after the last date that such property is used as the principal residence of the taxpayer or the taxpayer’s spouse,
(II) any period (not to exceed an aggregate period of 10 years) during which the taxpayer or the taxpayer’s spouse is serving on qualified official extended duty (as defined in subsection (d)(9)(C)) described in clause (i), (ii), or (iii) of subsection (d)(9)(A), and
(III) any other period of temporary absence (not to exceed an aggregate period of 2 years) due to change of employment, health conditions, or such other unforeseen circumstances as may be specified by the Secretary.

<a rel="nofollow" target="_blank" href="https://www.law.cornell.edu/uscode/text/26/121#b_5">https://www.law.cornell.edu/uscode/text/26/121#b...>

[Opus 17]

<a rel="nofollow" target="_blank" href="https://www.law.cornell.edu/uscode/text/26/121">https://www.law.cornell.edu/uscode/text/26/121</a>

(C) Period of nonqualified useFor purposes of this paragraph—
  (i) In general
The term “period of nonqualified use” means any period (other than the portion of any period preceding January 1, 2009) during which the property is not used as the principal residence of the taxpayer or the taxpayer’s spouse or former spouse.
  (ii) Exceptions The term “period of nonqualified use” does not include—
     (I) any portion of the 5-year period described in subsection (a) which is after the last date that such property is used as the principal residence of the taxpayer or the taxpayer’s spouse,
     (II) any period (not to exceed an aggregate period of 10 years) during which the taxpayer or the taxpayer’s spouse is serving on qualified official extended duty (as defined in subsection (d)(9)(C)) described in clause (i), (ii), or (iii) of subsection (d)(9)(A), and
     (III) any other period of temporary absence (not to exceed an aggregate period of 2 years) due to change of employment, health conditions, or such other unforeseen circumstances as may be specified by the Secretary.



Let me call out section (C)(ii)(I)
"The term “period of nonqualified use” does not include...any portion of the 5-year period described in subsection (a) which is AFTER the last date that such property is used as the principal residence of the taxpayer or the taxpayer’s spouse,"

So ANY period of non-use is non-use, EXCEPT for periods that occur AFTER THE LAST DATE the property is used.

So let's consider.

Bought on 1/1/14
Rented on 1/1/16  (2 years of qualified use)
Sell on 1/1/18 (these 2 years fall under the exception in (C)(ii)(I) , so it is considered qualified use and all gain is excludable)

Bought on 1/1/14
Rented on 1/1/15
Convert back to residence on 1/1/16
Sell on 1/1/17
The homeowner has 2 total years of qualified use, which, although not in a single block, still satisfies section (a).   But the period of time from 1/1/15 to 1/1/16 when it was rented is non-qualified use.  It does NOT fall under the exception granted in (C)(ii)(I), because it is not AFTER THE LAST DATE the property was used as a principle residence.


The section you selected describes that the 2 year rule can be satisfied in aggregate rather than a single block of time.  That is IRC 121(a).  But you are ignoring that the limitations in IRC 121(b) have an entirely separate set of rules, of which 121(b)(5)(C)(ii)(I) is but one.

[texastexas]

Bought 2009 (used as primary residence)

Rented 7/15/2016 (purchased another home this year to use as primary residence)

Sold 11/8/2019

Status:  Married, filing jointly

Question:  I am trying to determine if we qualify for home sale exclusion, partial exclusion, or none at all.   We lived in the home as our primary residence for almost 7 years.   ***Note - I am trying to determine if the exception to "period of nonqualified use" grants us the opportunity to qualify for tax exclusion as it seems we missed the mark by about 4 months).   Can we claim a partial exclusion for the 20 months we lived in it of the 5 years prior to sale?  Your help is greatly appreciated.  

[DMarkM1]

From what I see it doesn't appear a partial exclusion applies.  However here is the Publication that discusses the potential qualifications for the partial exclusion.  Basically, the sale has to be work-related, health-related, due to unforseen events, or due to other uncontrollable facts and circumstances.  You may find something in those latter paragraphs that has not been shared here.  

[yangyingtina]

This is a good discussion! I have similar question, but different than the situation in the example. What if I bought the house, rented it for 2 years, and live there for 5 years, sold it. Is the capital gain (assume 140K) exemption calculated proportionally, only 5/7 * 140 = 100K exempted? Reading the section B, the non-qualified use did not happen in the past 5 years before sell, should the whole 140K get exempted? 

[Hal_Al]

@yangyingtina - Only 5/7 of the gain is excludable.

2/7 + depreciation recapture is taxable. 

[GSL2457]

I also have this question along the same lines.  We are about to sell condo, closing with luck on May 1, 2020.  Trying to figure exclusion.  We do meet eligibility for full $500,000 exclusion, but I cannot figure out the non-use area.  I keep re-reading, think I understand, only to read again and get more confused.  For example, do we count ANY of the period prior to the 5 years before sale?  If so, that would mean 1/1/2009 - 11/24/2014 would be considered in the calculations for non-use.  ANY help would be immensely appreciated --

Owned since 10/30/87

Period from 1/1/2009 - 11/24/2014 - Rented most of that time 

Moved back in - 11/25/2014 - 12/31/2017

Bought house out of state as of 1/1/2018

Condo empty, not rented, to date of sale which will be 5/1/2020.

So out of the 5 years before the upcoming date of sale, we lived in it for a full 3 years (at beginning of 5 year period).  It has been empty the last two years.

[DaveF1006]

This is strictly determined during the 5-year period ending on the date of the sale, please read this IRS link for more details.

[GSL2457]

I've read many of the publications, the 2013 and 2019 Publication 523s most helpful and clear with examples.  However, are you saying I don't even have to consider the period 1/1/2009 - 11/24/2014?  I ONLY have to deal with the 5 year period preceding the sale?  Which would be from 5/1/2015 to 5/1/2020.  That would be great because here I was counting all the days from 1/1/2009 that we were not living in the property. 

[Hal_Al]

@GSL2457 I assume it was  also your home from 10/30/87 to 1/1/09.

The period from 1/1/09 to 11/24/14 was non qualified use.

You meet the 2 out of 5 year requirement, if sold before 12/31/20.

You lived in the home 292* months and had 71 months of non qualified use.  ~80% (292 / (292+71) of your gain is excludable, up to $500,000.  ~20% and depreciation recapture is taxable.

TurboTax handles this very smoothly.  Enter at Home sale, under Less Common Income.

*I'm not sure, but the vacant time prior to sale may also count as qualified use for purposes of the tax calculation (but not for the 2/5 rule)

[GSL2457]

Thank you for that info.  We also lived in the home from 10/30/1987 to 4/22/1992, but rented it pretty much until we moved back in 11/24/2014. I didn't think anything before 2009 mattered except for the time we first purchased the property, so didn't include that info.

[Hal_Al]

That's correct, only non qualified use after 1-1-09 counts against you.

Just enter your info in the TT interview, it can handle the details.

[melissamerica]

One can take the full exclusion if the home was never a primary AFTER it was a rental.  Otherwise, you must pay gain on the portion when it was your main home after it was a rental

[ErnieS0]

Possibly. It depends on how long you rented the home before selling it, @melissameria. 

The IRS says:

If you used and owned the property as your principal residence for an aggregated 2 years out of the 5-year period ending on the date of sale, you have met the ownership and use tests for the exclusion.

This is true even though the property was used as rental property for the 3 years before the date of the sale.

In that case, you would qualify to exclude some or all of the gain on the sale of your home if you didn't use the exclusion on the sale of another residence during the 2-year period that ends on the date of sale, or if you used the exclusion within the last 2 years but this sale of your home is due to a change in employment, health, or unforeseen circumstances.

See Property (Basis, Sale of Home, etc.) 5

[melissamerica]

Agree.  My reply was targeted at the conditions under which one may have a period of unqualified use assuming they’ve otherwise met the conditions required for the 2 of 5 year exclusion.  Any period of time the property is one’s primary AFTER it has been a rental is unqualified use and that period is ineligible for exclusion.